Alternative strategy to prevent problematic housing projects
LETTER | We refer to the National HBA writing in iProperty in August 22, 2022, under the heading “Increase in the number of “sick people” or delayed real estate developments in malaysia: why is this happening? » where house Buyers’ Association (HBA) highlighted statistics on problematic property deals in Malaysia.
Malaysia casualties estimates that approximately 52,000 homebuyers are currently affected in July 2022 with an estimated illiquidity of RM13 billion (estimated commitment of RM250,000 per homebuyer).
As another NGO alongside HBA, Victims Malaysia has been actively helping victims of problematic housing projects since 2008. We have to agree with HBA that the problem is getting worse despite numerous measures and changes to the law.
Unfortunately, the article failed to capture the root cause of the problem from a macro perspective. Despite numerous fixes in the Housing Development Act Amendment since 2000, the situation has worsened.
HDA118 is a law that looks good on paper, but has proven unable to prevent housing problems that have led to economic problems. The statistics presented in the article testify that the law has let consumers down despite the many revisions made over the years. The problems have escalated and this proves that consumer protection in law remains nil.
Should we keep and pursue the amendment of such laws? National Housing Department (JPN), the guardian of the law is the hardest hit and yet he continues to persevere and “business as usual” (BAU) and endure the burden of being a regulator.
Some would say that the presence of HDA118 prevented many problems. Statistically, this is not a proven claim. Developers complain about tedious requirements. With or without the law, the products would have been delivered as promised if the developer had chosen to be responsible and professional and maintain a strong sense of responsibility.
The law is supposed to create a healthy market for the benefit of all. In the current situation, this is not the case. The law is weak and despite many changes has not brought the desired result but more work for JPN staff. The image of the industry is affected and scares away potential buyers.
Another contributing factor that is often overlooked is the “debt bondage” propagated by banks under the leadership of Bank Negara. Banks although they are a financial partner of purchases; benefited from the transaction without sharing the risk.
It makes money whether or not buyers have secured their home. They take advantage of the upside but refrain from any downside risk. It is time for all stakeholders to approach the issue differently. Victims Malaysia proposed the following:
Regulatory changes: The HDA118 must license developers who build projects on the Build Then Sell (BTS) scheme. A license is not for everyone but for developers who show they have the skills and financial strength to complete projects. This is different from HBA’s own BTS10/90. In the BTS10/90 contract, the buyers always bear the financial risk. This is an initial payment (10 percent) with the balance (90 percent) deferred until project completion. The banks, although they are capital partners, still bear no risk under the BTS10/90.
Banks must be capital and risk partners: BTS must be backed by banks on the basis of an arrangement practiced in the United Kingdom. Under this program, banks purchase a property under construction and lease it to a consumer upon completion. The modus operandi is described as follows:
I. Step 1: Potential owner (PHO) has identified a property they want to own.
ii. Step 2: PHO approaches the bank with the intention of entering into a lease-to-own agreement. Banks will do the necessary underwriting to ensure that the consumer can pay rental commitments and impose advance rental charges. The bank may charge a reasonable processing fee and prepayment of the lease pending completion of the property.
iii. Step 3: The bank engages the developer that the PHO has identified and purchases the property from him on mutually agreed terms. The property is registered in the name of the bank. Upon completion of the property, the bank leases it to the PHO under a “Lease with option to buy” (LWOB) contract structure. The contract must specify the terms of the agreement which include the monthly commitment and the options to buy at the end of the lease with pre-agreed terms where the final amount of the lease is defined as the sale price.
Under this arrangement, the banks, being a strong organization, have the power to verify the financial and technical capacity of the developers before deciding to purchase the property. The tenant who has chosen not to stay on the lease and purchase the property after paying the “deposit and monthly lease”, may opt out and lose their option to own the property.
Banks can sell the property to others on an outright sale of a finished product. In this way, the bank earns its income on a fair equity/risk ratio with the home buyer.
The foreseeable challenges of the various stakeholders are the following:
Housing regulator: It is necessary to revise the HDA118. The regulator should not allow unfinished properties to be sold to the public, except for direct deals between licensed developers and banks or its SPVs. Severe penalties must be imposed on licensed and unlicensed developers who sell unfinished homes to individuals. The different SPA schedules to be repealed. There are no restrictions on selling a completed home with CCC.
Stamp duty: Necessary to discuss with IRB and MOF to exempt home buyers from any stamp duty the bank faces. Inland Revenue Council (IRB) can impose an appropriate tax rate on leases.
Developers (Rehda): They are unlikely to oppose the deal, but they may not be satisfied as they no longer enjoy the protection and benefits of the existing HDA118 SPA. Banks can insist on having more protective terms with the promoter, including appointing professionals to oversee the contract
Banks: Banks in Malaysia that enjoyed high profits and low-risk income can object and are now required to do more to justify their income. As it has been done in the UK and many other Islamic countries, there is no reason it can’t be done here. Bank Negara must convince the banks. The LWOB contract must be regulated and standardized by the Bank Negara to protect the interests of consumers.
The success of the proposed structure requires the political will of the government (Bank NegaraLodging and Ministry of Local Authorities, IRB and Ministry of Finance). The first bank to do so will benefit from the first-mover advantage. That would almost guarantee a 100 percent lessee agreement which would improve its profitability.
This will ensure that the developer sells the right product in the right place with certain standards. If developers want banks to back them, they need to make sure the product creates value for the market.
It has been 14 years since Victims Malaysia participated as a stakeholder in the housing industry. Previously we have listened to HBA and other stakeholders and accepted the need for frequent changes in housing laws and we have seen the failures. It’s time to do something revolutionary.
The BTS structure with LWOB will create a healthy market and protect weak consumers.
We urge all parties to give our proposal the consideration it deserves. Look at it with an open heart and mind.
The the writer is the president of Malaysia victims.
The opinions expressed here are those of the author/contributor and do not necessarily represent the views of Malaysiakini.
The views expressed here are those of the author/contributor and do not necessarily represent the views of Malaysiakini.